February 3, 2021
“Rembrandts in the Attic” Investment Theme: Finding Deep Value through Hidden Assets

In my previous posts, I explained that, despite my bottom-up company specific approach, many of my investments can be grouped into a number of powerful themes or trends. Today, I’d like to tell you about one theme which I have successfully exploited time and again in finding exceptional value anomalies in the market. I actively look for businesses with very valuable hidden assets. While most investors are busy pouring over the prospects of the core business, it is actually surprising how often it is possible to find non-core assets or nascent growth subsidiaries within the company’s activities which represent significant or even transformational value to the business as a whole. The great thing is that these types of situations can be found in any sector. My rationale behind this approach is that these assets give significant extra upside to the base case investment rationale.

Rembrandts in the Attic: they exist!
The name I have given this theme comes from a seminal business book I read, first published in the late 90s. As the internet transformed the business landscape, traditional valuation metrics were increasingly ill-equipped to identify value: for example, the book value of the factory building or machinery became increasingly irrelevant in terms of predicting a company’s profit earning potential. The authors, Messrs Kevin Rivette and David Kline, were amongst the first to advocate including the value of intangibles like patents and other intellectual property in the assessment of business prospects and value. They argued that CEOs in particular could identify and unlock enormous financial and competitive power hidden in their patent portfolios.

While the book’s approach isn’t exactly what we are seeking to do as investors, the premise is very relevant: a company’s true value is sometimes not just about its traditional assets or the earnings stream of its core business. The beauty of looking for these hidden assets is that they exist because they aren’t easily identifiable by traditional investment ratios and metrics. In my typically risk-averse way, I also like the fact that these investments often have solid and profitable core businesses which generate cash returns for us while we wait for the value upside to be fully realised.

It’s incredible how many companies I have found over the years where their intrinsic value is based upon the ownership of a high-value asset or business that is not on investors’ radar and often isn’t included as part of analysts’ forward-looking earnings estimates. These could be non-core assets from another life of the business or small nascent early stage businesses with incredible prospects (often better prospects than if they were stand-alone, given the ready supply of cash and contacts and even installed base provided by the parent company). In my opinion, these “Rembrandt in the Attic” plays are actually really deep value plays, far cheaper and with better prospects than any struggling business on a low PE! In extreme cases, the non-core ‘hidden asset’ is worth many times the whole business (witness Racal Electronics’ extremely ill-judged sale of its ‘niche business communications’ subsidiary Vodafone!!).

The reason that they exist
Business is dynamic and a small insignificant part of the business today may be an underappreciated crown jewel with much higher rating prospects as it grows. My bottom-up fundamental research approach is ideally suited to finding these. I love these types of investments as they are effectively less risky each way bets: we aren’t buying blue-sky jam tomorrow startups with inherent ‘winner takes all’ risk profiles. We are usually buying a solid profitable business where the gradual realisation of the value of the hidden assets within the portfolio adds another leg to the upside.

What’s Not to Like about These Hidden Value Plays
The caveat is that the existence of these opportunities requires market inefficiency so it’s far more likely that we find these gems lower down the under-researched market cap scale. In addition, it obviously requires time-consuming detailed research to understand and uncover them. Finally, they may remain undervalued for long periods of time and the value we see may not be realised in a sensible investment time horizon without the existence of a catalyst.

Rembrandts in the Attic Examples
Here are some examples of Rembrandts in the Attic plays in my portfolio. I will write more fully on each over subsequent posts:

Rembrandts in the attic examples for Pynk community investment play
  • US mega cap General Motors is seen as a sprawling dying business making gas guzzling cars. But within its portfolio, it has a meaningful and growing exposure to electric vehicles and can choose to partner up with whomever it wants to add the missing pieces to the EV jigsaw puzzle, with obvious implications for the valuation
  • US mega cap Cummins is in an even more unattractive sector than General Motors (diesel engines). But it has the most attractive and near term exposure to the use of hydrogen as fuel that I have found, while we see businesses in the hydrogen fuel sector with no clear prospect yet of viable and profitable products valued at enormous ratings by the market
  • UK small cap newspaper group Reach has one of the largest online audiences in the UK, the size of which is almost comparable to exalted names like Google, Facebook, Microsoft and Amazon
  • UK small cap CRO Open Orphan has a number of hidden assets. One example is its non-core 49% holding of Imutex – a late stage malaria vaccine company - where Merck bought an identical business this year at about half the market value of Open Orphan. It is also looking at monetising the health data it has picked up incidentally over the past two decades and selling this to wearable fitness providers
  • UK mid cap Smart Metering Systems has a nascent home battery energy storage business which is on no one’s radar even though it has excellent prospects thanks to the group’s long-term customer relationships and huge installed base
  • UK small cap Hargreaves Services used to be a coal miner but is now providing higher growth and better regarded environmental services. The business now owns a very attractive (ex-coal mining) land bank ripe for residential development

Now It’s Your Turn!
We in the Investment Committee are very keen to turbo charge our investment process through the wisdom of this amazing crowd and invite you all to tell us your ideas of great business with “Rembrandts in the Attic” we should be looking at and why!

Disclaimer: This information does not constitute any form of advice or recommendation by Pynk One Ltd. and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.

When investing, your capital is at risk and you may recover less than the initial investment.

Written by
Pouneh Bligaard
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